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How much money does Acme need to borrow

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Question - Acme Co operates in a world with perfect capital markets where there are no taxes. Acme pays out all available earnings as dividends. Acme is an all-equity financed firm and is considering borrowing money to repurchase its shares. Acme has 500,000 shares outstanding and Acme is expected to generate $1,500,000 in EBIT every year for the foreseeable future. Acme's shareholders require an 8% return on their investment. If Acme borrows money, it will have to pay a 4% annual interest on its debt. Acme's CFO wants to borrow money to repurchase shares such that Acme's shareholders achieve a return on equity (ROE) of 15%. How much money does Acme need to borrow to repurchase shares?

Reference no: EM133124281

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